Investors should increase allocations to equities, including European equities, as not since the 1950s has the asset class been so cheap compared to bonds and cash, an audience of fund buyers heard last week at a Pioneer Investments conference.
Giordano Lombardo, chief investment officer and deputy chief executive of Pioneer, said: “It’s absolutely right to consider risky assets and particularly equities. They offer better value than any other alternatives, especially bonds, and they have a better risk-reward profile in the longer run.”
Lombardo said that he expected European equities, which have more attractive valuations compared to the US partly because of investor scepticism towards the eurozone, to be one of the top performing asset classes in the near future.
Diego Franzin, head of equity – Europe at Pioneer, said: “If you compare it to cash and bonds it does not happen very often that equities are so cheap in comparison. It last happened in the ‘50s when the ‘cult of the equity’ was born.”
Pioneer, which has €165 billion under management, increased its allocation to European equities when its sentiment turned positive relative to a previous preference for US equities in June last year. Notably, this was before the July announcement by Mario Draghi, president of the European Central Bank, to do “whatever it takes” to save the eurozone from collapse. The climb in equities markets across Europe in recent months can be dated to that speech.
Lombardo told the conference of international fund buyers that both the chief investment officer of a European insurance company, and an Asian sovereign wealth fund, had told him in recent months that they would like to invest in European equities.
A recognition that austerity had been the wrong policy response to low growth, and an easing of austerity measures, support the macroeconomic case, said Lombardo.
“A lot of ground has been covered in terms of austerity. The additional level of austerity will be much less if not close to zero.”
He pointed out that countries including France and Spain had been given longer to reach their budgetary targets.
However, he also warned that the failure of the transmission mechanism – the banks, which were supposed to channel the liquidity created by monetary authorities into the real economy – was behind increased asset prices, benefiting mainly the wealthy.
An increase in lending is the next sign that could carry eurozone equities forward, Lombardo said, and he pointed to the recent deal for KfW, the German development bank, to lend €800 million to Spanish small and medium enterprises as a positive step.
But Lombardo also warned against a possible bubble in dividend-paying equities.
Though he said this was not a near-term danger, he said a result of the search for income by investors could be inflated asset prices, both in bonds and income equities.
High dividend-paying equities have been in favour for many funds in recent years.
“The important thing is knowing when at some stage you are buying beyond the fundamentals.”
The Pioneer conference was held in Dublin, where the firm has one of its investment hubs. Funds Europe was the media partner.
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